Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

Question IFRS7-2

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 385

Short Answer

On December 31, 2017, Firth Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest-rate note. The note was issued to yield 10% interest. Unfortunately, during 2019, Firth began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would collect only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Instructions

(a) Prepare the entry (if any) to record the impairment of the loan on December 31, 2019, by Paris Bank.

(b) Prepare the entry on March 31, 2020, if Paris learns that Firth will be able to repay the loan under the original terms.

The business entity will incur an impairment loss of $18,783.

See the step by step solution

Step by Step Solution

Definition of Loan

A loan can be defined as the money lent by any financial institution or individual to another business or individual. Such money is reported as a liability by the individual or firm taking it.

Journal Entry for Impairment of Loan

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2019

Bad Debt expenses

$18,783

Allowance for doubtful account

$18,783

Working note:

Note amortization schedule

Date

Cash Received

Interest revenue @ 10%

Increase in carrying amount

Carrying amount of note

31 Dec 2017

0

0

0

$62,092

31 Dec 2018

0

$6,209

$6,209

$68,301

31 Dec 2019

0

$6,830

$6,830

$75,131

Computation of Impairment loss:

Particular

Amount $

Carrying amount

$75,131

Less: Present value of $75,000 @10% for 3 years (PVF: 0.7513)

($56,348)

Impairment loss

$18,783

Recovery of Loan

Date

Accounts and Explanation

Debit $

Credit $

31 March 2020

Allowance for doubtful account

$18,783

Bad Debt expenses

$18,783

Most popular questions for Business-studies Textbooks

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.